The Penglai oil spill that happened one month ago has left the China National Offshore Oil Corporation (hereafter referred to as CNOOC) trapped in a dilemma. In early June 2011, successive oil spill accidents occurred at two drilling platforms in the Penglai 19-3 oil field. CNOOC owns 51% of the total shares of the 19-3 oil field, but both the CNOOC and operator ConocoPhillips China Inc. (hereafter referred to as COPC) did not disclose this information at that time.

At present, both CNOOC and COPC are accused of concealing the accidents. Although as the operator COPC will take the majority of the blame for the spills, as the cooperating party CNOOC will not be exempted from its own responsibilities.

In 2010, CNOOC successfully established the 50 million ton oil production “Offshore Daqing” program. Its objective is to construct four Oceanic Daqings. Apart from the Offshore Daqing, this program also includes the Deepwater, Overseas, and LNG Daqings.

The oil spill accidents have reduced the daily output of the Penglai 19-3 oil field by 7,000 barrels. Moreover, CNOOC insiders have stated that the “Oceanic Daqing” program would be probably affected by the oil spill scandal.

Late Disclosure of the Oil Spills

The State Oceanic Administration building was bustling with people on the afternoon of July 5th. A meeting room on the second floor of the Oceanic Administration was crowded with more than 70 international and domestic journalists, and the total attendance was more than 90 people.

“This day marks the largest press conference yet held by the State Oceanic Administration.” Li Xiaoming, the director of the Marine Environmental Protection Division in the State Oceanic Administration, stated before the briefing.

However, the principals of both COPC and CNOOC were notably absent from this briefing. COPC is an internationally integrated energy corporation. It is the third largest energy corporation and the largest oil company in the United States.

On the same day, the State Oceanic Administration made public the relevant circumstances of the 19-3 oil spill. According to the information released by the Oceanic Administration, this oil spill accident occurred one month ago.

At present, Penglai 19-3 is the largest oil field in China, and is referred to as the Offshore Daqing. The operator of this oil field is COPC and the cooperator is CNOOC. The former has 49% of the total shares and the latter has 51%. Given these facts, attendees of the July 5th meeting were puzzled as to why the State Oceanic Administration made no mention of CNOOC in its hour-long briefing.

As the oil field operator, the COPC was blamed for the oil spill accident. He Jianmiao, the commissar of the Beihai No.2 detachment, China Marine Surveillance Corps, said that the law enforcement department of China Marine Surveillance was investigating the oil spill under the current Marine Environment Protection Law of the People's Republic of China.

On the second day of the press conference held by the State Oceanic Administration, COPC and the CNOOC held a press conference in Beijing. Ryan Lance, the senior deputy president of COPC, had paid a special visit to China to address the oil spill accident. Four other COPC senior executives accompanied him to the press conference. Three senior executives of CNOOC led by the deputy president were also in attendance.

At the press conference, COPC and CNOOC apologized to the public for the oil spill accident and for the first time, CNOOC promised that it would uphold its own responsibilities. Previously, COPC and CNOOC had kept silent on the oil spill accident.

Mounting Troubles from the Penglai Oil Spill

Apart from CNOOC and COPC, the State Oceanic Administration had also remained silent on the Penglai 19-3 oil spill. On June 4th, a COPC report titled “A small amount of oil film appeared to the northeast of Platform B in the Penglai 19-3 oil field” was delivered to the Beihai branch office of State Oceanic Administration. The report was written by COPC as the operating party and was also delivered to CNOOC.

Due to the recent oil spill disaster in the Gulf of Mexico, this report of an oil film with unknown origin drew the attention of the Beihai branch office. Insiders from the Beihai branch office said that after receiving the report, executives asked COPC to immediately inspect the oil field and fix any problems.

Four days later, COPC reported that an underwater oil pool had been found to the northeast of Platform B. The Beihai branch office dispatched investigators to extract oil film samples for analysis and confirmed that the origin of the oil spill was Platform B of the 19-3 oil field.

On June 16th, the State Oceanic Administration arranged an interview with COPC and asked it to make news of the oil spill public.

At 11:00 AM on the next day, the Beihai branch office received news that large amounts of oil had been found in the waters near Platform C in the Penglai 19-3 oil field.

Further reports from COPC said that slight well kicking and sideways leaking during the operation of well C20, on Platform C had led to the oil spill.

“The Platform B oil spill was caused by water flooding and debris reinjection into the Penglai 19-3 oil field. As ground pressure near the platform increased, energy built up and led to the oil spill,” said Li Xiaoming.

After the Platform C oil spill, COPC negotiated with CNOOC and the two parties decided to stop all operations within the 19-3 oil field until they were able to control the spill. To this end, COPC implemented fixes on the two platforms and brought the oil spill under control. “At the very least, as the operator, COPC should contain the initial oil spill and disclose the accident in order to afford outside parties time to prepare for its effects,” said an industry expert.

In this context, COPC explained that “this accident occurred in China, and the relevant Chinese governmental departments along with our partner CNOOC were notified. We acted in a timely manner in accordance with relevant regulations.” The State Oceanic Administration has also explained that analysis of the 19-3 oil spill is limited by the level of monitoring technology.

The monitoring data provided by the State Oceanic Administration showed that as of July 4th, the oil spill has resulted in an 840 square kilometer area of grade IV or worse water quality. In fact, the single largest one-day oil outflow contaminated 158 square kilometers.

Who is to blame?

By June 21st the Platform C oil spill had been contained but news of the accident had spread throughout the Chinese micro-blogosphere. However, COPC remained silent on the incident.

One CNOOC insider said that since the Penglai 19-3 oil field’s operator is COPC, they alone should have handled the disclosure of the accident. “In my opinion, responsibility for the oil spill lies with the oil platforms’ operator COPC,” the insider said.

Wang Bing, the director of the Marine Environmental Protection Division, State Oceanic Administration told a newspaper in a July 5th statement, that according to relevant regulations the operator must bear the risk and full liability for any potential oil spill. “There is no mention of CNOOC’s role, and this reflects an intentional bias towards CNOOC,” said an expert who has been engaged in oil exploration for several decades.

Han Xiaoping, the CIO of Cleantech China, said that CNOOC should not take the majority of the blame over the concealment and non-disclosure of the 19-3 oil spill. However, he believed that CNOOC should urge the operator to disclose relevant information to the public as soon as possible.

The above-mentioned experts said that according to the existing customs and practices, the operator automatically bears the responsibility for the accident. The cooperator’s responsibilities and role are outlined under the contract’s provisions.

However, in the 2010 Gulf of Mexico oil spill, the British BP Corporation was not the operator but under US regulations bore responsibility for the accident. BP was forced to sell oil and gas assets to raise 20 billion US dollars for compensation.

COPC is currently assessing and evaluating the damages caused by the accident and will develop a compensation program. Li Xiaoming said that according to the Marine Environmental Protection Law, the State Oceanic Administration could press the responsible party for compensation on behalf of the nation itself along with re-evaluating the specific damages caused and compensation required.

Chen Bi said that the operator is responsible for handling the oil spill and that the exact liability shall be judged by the nature of the accident. However, COPC and CNOOC had previously signed an agreement to share responsibilities.

Deep Troubles for the Offshore Daqing

For CNOOC, the oil spill will not likely impose large economic compensation costs, but the future of CNOOC's "Offshore Daqing" plan may nevertheless be affected.

The land-based oil production market in China is practically monopolized by CNPC and Sinopec, so CNOOC must focus on offshore oil exploration in order to narrow the gap between itself and the two tycoons.

Early last year, the CNOOC issued its “No.1 document”. This objective of this plan was to produce up to 50 million tons of gas and oil equivalents by the end of 2010. In 2009, the output of CNOOC was 39.25 million tons of equivalents. Some of this increase in oil production will occur in the Bohai Bay’s Penglai 19-3 oil field. This year alone, CNOOC plans to raise the output of Penglai 19-3 from 56,000 barrels to 60,000 barrels per day.

CNOOC’s objective for the near future is to construct four “Offshore Daqings” by 2020. Of these four installations, completion of the “Deepwater Daqing” remains the current priority. Over the 12th Five Year Plan, CNOOC will invest more than 350 billion RMB towards exploitation and development of offshore oil resources.

COPC was forced to shut down Platforms B and C due to the oil spill and because of this the Penglai 19-3 oil field has decreased daily production by 7,000 barrels.

CNOOC insiders said that the Penglai 19-3 incident and the underwater spill at Platform B is the first large-scale domestic oil spill. From now on, oil fields operations will be conducted more cautiously and the exploitation of new resources will proceed at a slower pace.

Some analysts believe that the acceleration of oil production due to CNOOC’s efforts to meet its “Offshore Daqing” objective of 50 million tons of oil equivalents pushed the development of its oil fields to full capacity. In this scenario, the rapid development of CNOOC’s oil fields increased the probability of an oil spill.

An insider at CNOOC said that in order to fulfill the 50 million ton annual oil production target, the daily output of every oil well was tracked and recorded. “This level of monitoring placed very high scrutiny on individual oil wells and led to the intensification of production,” the insider noted.

CNOOC’s efforts to increase oil production over the last two years have been accompanied by a stream of accidents. On April 22nd, 2011 CNOOC disclosed that Bohai Bay’s Floating Production Storage Unit (FPSO) had to be taken offline and necessitated the closure of four oil fields including the Bozhong 28-2. This incident alone led to a production loss of 39,000 barrels in just one day.

Half a month later, an oil spill occurred at CNOOC’s Nanhai No.1 oil field in the northern block Bozhong 34-1. Early September of the 2009, it was announced that two oil spills less than a month apart had occurred in the Fushan-Hainan oil field. This oil field was also under CNOOC’s management. Finally, leakage from an oil pipeline polluted a small nearby reservoir and contaminated about 200 acres of a local village’s paddy fields.